MPs call for root and branch reforms to cut inheritance tax

A group of MPs have called for root and branch reforms of the inheritance tax system, including a cut in the standard rate from 40% to 10%.

They also want to scrap most of the current tax reliefs, including the seven-year rule that allows you to pass on wealth without any tax implications.

Instead, the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness wants a new annual allowance of £30,000 for lifetime gifts. Donations above that amount would be taxed at 10%.

John Stevenson, Conservative chairman of the group, said: “The huge complexity around how the tax is levied, and the reliefs available on it, leads to lots of confusion and a strong sense of injustice: the rich get away with not paying and IHT is perceived as an unfair penalty on hard working savers.

“Our bold proposals for reform seek to address this unfairness by simplifying the system and ensuring that the higher value estates that currently take advantage of so many reliefs and exemptions actually pay some IHT.”

Hopes of improvements were raised two years ago when the Office of Tax Simplification (OTS) carried out a review of inheritance tax thresholds to bring them up to date. The OTS did recommend changes but so far, none of them have been implemented.

The Treasury welcomed the new report by the all-party group but gave no indication that any of the proposals would be adopted.

This means that people wishing to reduce their family’s tax liabilities need to make the most of the reliefs currently in existence.

Inheritance tax is set at 40% and becomes payable once the tax-free threshold of £325,000 has been passed. There is no tax liability if a person’s estate passes directly to their spouse. This exemption does not apply to their children.

The government recognised that more and more families are being caught by inheritance tax and introduced an additional main residence allowance of £125,000. It came into effect in April 2017 and only applies to a person’s home, not the rest of their estate. It was set to rise gradually to £175,000 by this year.

When added to the £325,000 nil-rate band for inheritance tax, this provides a combined tax-free band of £500,000. Married couples can combine their allowances. When one partner dies, their share of the estate is passed on to their spouse free of any inheritance tax.

This means that a married couple could have a combined allowance of £1m. 

There are also other steps people can take to reduce the burden.

One helpful way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.

There is also a ‘seven-year gift rule’ as mentioned above, which allows a person to give money or assets of unlimited value. The recipient will not pay inheritance tax if the donor lives for at least seven years. If the donor dies within seven years of making a gift then the recipient could be liable to pay the 40% inheritance tax, depending on the value of the estate.

These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.

Please contact Nicki Denton-Masih or Jamiel Zaman if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.